Economic Value Added A Study On Selected Indian Banks
Economic Value Added A Study On Selected Indian Banks
I, , hereby declare that the research project report entitled Economic Value Added:
A study on selected Indian Banks submitted in the partial fulfillment of the
requirement, of Master of Business Administration to Kurukshetra University,
Kurukshetra through Jan Nayak Ch. Devi Lal College of Engineering, Sirsa, is my
original work and the same has not been submitted to any other institution for the
award of any other degree and the suggestions as approved by the project guide are
duly incorporated.
Certificate
This is to certify that _____________ a student of Master of Business
Administration in Department of Management Studies, Jan Nayak Ch. Devi Lal
College of Engineering, Sirsa has successfully completed the Project Report on
Study of mobile users Satisfactions & uses of features under my guidance
towards the partial fulfillment of her Master of Business Administration.
ACKNOWLEDGEMENT
It is a matter of delectation for me to express my gratitude to my revered guide and
true mentor Mr. Ashok Kumar Lecturer Department of Management Studies, who
has been very generous and ever willing to help me through out this research work.
He helped me in shaping this research work by his knowledge and wisdom,
penetrating judgment and expertise. His valuable guidance, constructive criticism and
analytical approach and ever-lasting interest taken throughout this investigation in a
warm and self-offering academic environment have been a constant source of
inspiration to me.
My grateful acknowledgement is due to Dr. Kuldeep Singh, Head Department of
Management Studies, JCD College of Engineering, Sirsa who has encouraged and
inspired me from time to time during the course of my study.
I am also thankful to all staff members of our department and to the library staff of
JCD College of Engineering, Sirsa for extending me every help during my research
work. I would like to take this opportunity to thank my parents, family members,
relatives, near and dear ones who faced the brunt of this venture gracefully.
CONTENTS
Chapter
Title
Page(s)
Chapter I
Acknowledgement
List of Tables
Introduction
1-15
1
3
6
7
1.5
1.6
1.7
1.8
1.9
Performance
Modern Methods of Evaluating Banks Performance
Limitation of Traditional methods
Relevance of EVA for Indian Banks
Advantages of using Economic value Added
Myths About Economic Value Added
9
9
10
12
13
1.10
15
Review of Literature
Research Methodology
16-28
29-34
Introduction
Objectives of Study
Research Design
Data Collection
Selection of sample
Procedure
29
29
30
30
30
31
35-55
Introduction
35
Tables
37-55
Conclusion
56-61
56
58
62-64
65-71
1.1
1.2
1.3
1.4
Chapter II
Chapter III
3.1
3.2
3.3
3..3.1
3.3.2
3.3.3
Chapter IV
4.1
Chapter - V
5.1
5.2
Major Findings
Recommendations
Bibliography
Annexure
List Of Tables
Table
No.
Pages
4.1
37
4.2
39
4.3
4.4
40
41
Ranking of all Public Sector banks under study based on EVA/Net Worth ratio
4.5
42
43
4.6
44
Ranking of all Private Sector Banks under study based on EVA/Net worth ratio
45
4.8
46
48
4.10
4.11
50
51
4.12
52
53
4.14
Model Summery, ANOVA & Regression, Coefficient between EVA & NPA
4.15
Model Summery, ANOVA & Regression, Coefficient between EVA & Business
per Employee.
54
4.16
Model Summery, ANOVA & Regression, Coefficient between EVA & Profit per
Employee.
Chapter- I
55
Introduction
Chapter - I
Introduction
entry of new private banks, etc. this paradigm shift in the Indian banking sector can be
seen in terms of two dimensions: one relates to operational aspect especially
performance and risk-management system and the second dimension relates to
structural and external environment or exogenous aspects.
The most challenging thing today is how to evaluate these banks and from what
perspectives. Is evaluating Indian banks performance a rather straightforward issue as
any other corporation with the help of some standard conventional ratios? The answer
is no. Actually when one makes an attempt to conduct some kind of bank analysis to
differentiate good banks from bad ones, there are so many things which need to be
taken care of before the actual analysis can take shape. By merely using the standard
ratios for banks financial analysis, one can sometime reach to conclusions, which
could be far from actual. But at the sometime there has to be some mechanism
through which banks can be compared and evaluated. The traditional analysis largely
focused on parameters like Credit-Deposit Ratio commonly referred to as CD Ratio,
level of Non Performing Assets (NPAs), Capital Adequacy Ratios and the other usual
earning ratios. Things have changed now and just having a high CD Ratio doesnt
mean that you are a sound bank. The basic definition of banking business has
changed, largely due to the entry of private players and technology factor in the
banking industry who has given a totally new dimension to the banking business
which was never thought of a decade ago.
Many Indian banks are discovering that the key to their long-term growth does not lie
in the products and services along but in assets that can never be replicated, that is,
their unique relationship with customers, employees, suppliers and distributors,
investors and the communities they serve. One of the most fateful errors bankers
usually commit relates to their belief that merely reducing NPAs and thereby
maximizing profit would solve the problem of banking industry. Not only is this
belief still held by most of the bankers in India and therefore professionally
unacquainted by the changing profile of their shareholders and the capital market it
is held by virtually large number of myopic capains of the industry. Those things are
not going as well as they ought to be going for. Such banks could be due to economic
recession, poor demand for credit, rising manpower costs, political uncertainty,
inefficient ways of doing business, or is it something else?
One might point out that like a corporate; even banks can be judged from the behavior
of their stock prices. However, as bank stocks have not been very active on
exchanges, barring few on few occasions, should we conclude that Indian banks have
by and large failed to add values to their shareholders wealth. The answer is once
again no as one needs to evaluate private and public sector banks in a more dynamic
manner than just looking at their stock prices, Non-Performing Assets (NPAs), C/D
ratios and others. Many Indian banks seem to have destroyed shareholders wealth
over a period of time and only a few have positively contributed to their wealth.
With the help of EVA (Economic Value Added) which tell what the institution is doing
with investors hard earned money, the study examines an appropriate way of
evaluating banks performance and also find out which Indian banks have been able to
create ( or destroy ) shareholders wealth since March, 2001.
1.2
maximize the value of shareholders. Further contribution was made by Merton Miller
and Stern Steward.
EVA is the net operating profit minus an appropriate charge for the opportunity cost of
all capital invested in an enterprise. Hence, EVA is an estimate of true economic
profit, or the amount by which earning exceed or fall short of the required minimum
rate of return that shareholders and lenders could get by invested in other securities of
comparable risk. Jesson (1986) argues that managers do not like to free cash investors
even when no positive present value project is available.
About all, EVA helps in overcoming the ambiguity of financial goals and objectives.
Most companies use a plethora of measure to express their financial goals and
objectives. Strategic plans often are based on growth in revenue or market share.
ratio and make provision for Non-Performing Assets (NPAs). The sector has become
very competitive with the entry of many foreign and private sector banks. The face of
banking has been changing rapidly. Further, with falling spreads, rising provision for
NPAs and declining interest rates, the practical way for sustaining profitability of
banks is through reduction in transaction costs and increase in other income. Banks
are trying to trim costs but have achieved limited success because of fixed overheads.
Therefore, there is a need to reduce transaction costs and pass on a part of the savings
to customers by way of lower service charges. This will require tremendous efforts in
the area of technology and for banking to build capabilities to handle much bigger
volumes. There is no doubt that banking sector reforms have improved the
profitability, productivity and efficiency of banks, but in the days ahead, banks will
have to prepare themselves to face new challenges.
It is a known fact that banks and financial institutions in India face the problems of
swelling NPAs and the issue is becoming more and more unmanageable. What is
noteworthy is that much of the NPA burden was accumulated during the year of
reform. One would be surprised to know that the banks and the financial institutions
in India hold NPAs worth Rs. 110000 cr and the major contributors are the public
sector banks, owing around 60%of the NPAs in the system. NPA may be due to
mismanagement but it affects the financial performance. Bankers have realized that
unless the level of NPAs is reduced drastically, they will find it difficult to survive in
the global market.
1.3
did not really work in a financial services model, since almost everything a bank does
is cash related. Additionally, there was uncertainty as to whether deposits or
borrowings should be included. The reason this matters is that the inclusion of
deposits could dramatically reduce the weighted average cost of capital. Another
obstacle was the significant leverage implicit in a bank's balance sheet, which is
significantly different than for a manufacturing company.
In the early 1990s, many banks were failing and capital resources were rather scarce
for the survivors. Today, the banking industry as a whole is flush with capital. While
this is not a bad problem to have, compared to the crisis at the beginning of the
decade, there is increasing pressure to better manage the precious resource. For those
banks that do not have internal opportunities to utilize this capital, they often turn to
the acquisition arena or buy back their stock. Either way, they can't afford to sit on
underdeployed piles of capital. However, they are also conscious of their duty to
create shareholder value and desperately need systems to ensure that they are not
investing in businesses that actually destroy value. This was the main reason for
wsing EVA in banking sector.
shareholder value in a particular time period or not? There are real wars between
different famous authors as well as different consulting companies whereby every
company defends its own indicators and tries to find the misuses in the others. Some
of them are considered to be better than others. The main idea of all these measures is
to help the managers to make value-created decisions and orient all employees
towards value creation.
1.4
price.
ROCE=
-------------------------------------------------------------- *100
Average total capital employed
Earning Per Share (EPS): Since division of earning of the company by the
number of outstanding shares computes the earning per share, we will
most directly linked to the creation of shareholder wealth over time. EVA
is the operating profit minus an appropriate charge for the opportunity
cost of all capital invested in a firm. It is a value-based framework that
provides a unique insight into value creation and unites the finance theory
with the competitive strategy framework.
1.6
1.7
insight into value creation and links theory of finance with the competitive strategy
framework as enumerated by Michael Porter. EVA is also a quantifiable driver of
value creation for the stock markets. Large number of International banks (such as
Citibank, Deutsche Bank, Barclays, ABN AMRO) use value based frameworks such
as EVA to run their banking operations. Although EVA an a yardstick in India may be
at an evolving stage, banks like HDFC Bank, ICICI Bank etc. have gradually started
adapting such measure to cater to the increasingly discerning investor base. A banks
management creates value when it takes decisions that provide benefits, in excess of
costs. These benefits may come to banks in the near or distant future depending on the
strategies involved in decision making process. The bankers of todays world
therefore must be sensitive to two fundamental drivers that drive shareholders wealth.
First, there must be an unrelenting focus to ensure that funds mobilized by the banks
(whether through depositors, equity or debt issues) generate returns in excess of the
cost of capital (or can reasonably be expected to do so) with an eye toward returning
non productive capital back to providers of the capital or shareholders. Second,
bankers should constantly seek to invest in technology that increases their reach and
also be open to strategic alliances, mergers & acquisitions and restructuring. In the
same context it is worth considering that the capital mobilized by banks earns a
satisfactory return. While it is true that substantial amount of value creation for a bank
or corporate takes place from less than half of the capital employed, it proves that the
entity can unlock huge amount of capital employed for adding to the value for the
shareholders. The second point mentioned earlier, a necessary corollary to the first
point, emphasizes on the importance of investing in value creating projects and
strategies. It implies criticality of the fact that bankers must remain sensitive to all
such balance sheet items that add value either through mergers or acquisitions or
simply through restructuring, re-capitalization or any other method such as sell-off of
unproductive assets. Further, Banks management must be able to differentiate
between projects and strategies. While projects are generally viewed financially from
NPV or IRR point of view, they may not really convey the fact that whether value is
being added to the shareholders. For example, what distinguishes HDFC Bank, the
new futuristic bank from other savvy banks is its position in the new e-economy. The
anywhere-anytime bank is not averse of accepting the fact that customer is the
king and the bank has to tailor its products as per his requirements even if the new
product has a negative NPV assist alternative strategy of doing nothing may only
destroy value for HDFC Bank. Having established a massive base of customers and
holding extensive information about them, banks such as ICICI Bank and HDFC
Bank have already made major head start. They are now all set to leverage these
assets. As we all know the Internet has already started radically affecting fundamental
structures of even Indian banks, not only in retail operations, but in many other areas
including private banking. The bankers in the new millennium therefore must attempt
to make investment in strategies and not merely remain confined to borrowing and
lending. They should now play a role of financial service providers for increasing
their shareholders value.
1.8
By forecasting economic profit for each year it shows how much value will be
added to the capital employed each year.
It is the only method that can clearly connect capital budgeting and strategic
investment decisions with a methodology for subsequent evaluation of actual
performance.
General Motors was the first company to use the concept of EVA, and the
economic analysis based on it was presented in their annual report in 1920s.
but myth about EVA is that Stern Steward & Company of USA has
promulgated it. Stern Stewart & Company has just polished the concept.
Second myth about EVA is that, EVA based financial system can be
implemented by a company only by managing its cost of equity correctly. But
in practice, there are hundreds of adjustments to be incorporated in the
financial statements of a company if it has to implement such an EVA based
financial statements of a company if it has to implement such an EVA based
financial measurement system.
A very dangerous myth about EVA is that the value generated by different
companies as well as industries is comparable. But how can the EVA of a less
capital-intensive company be compared with a high capital-intensive
company. Thus, EVA of fast moving consumer goods or pharmaceutical
company can not be compared with the EVA of steel or a cement company.
However, the only comparison that can be made is regarding whether the
company has generated positive or negative EVA.
A company will be cash rich when its EVA is high. It is widely prevalent myth
about EVA. As Israel Shaked has mentioned that the basic sign in financial
analysis is to interpret EVA as an indicator of financial liquidity. For those
companies which are cash sensitive, Shaked recommends a measure called
Cash Value Added which takes into considerations operating cash flows in
place of net operating cash flows in place of net operating profit after taxes.
Hence, the EVA is not a model that is free from defect. It may provide best
results if one applies this tool after evidently understanding the facets in which
EVA cannot be of much use and by appreciating the nuts and bolts essential
for the execution of EVA.
Chapter II
Review of
Literature
Chapter - II
Review of literature
EVA calculations or measuring shareholders value has been the subject of intellectual
interest among the academic and practitioners in recent times. Earlier academic
studies have documented the literature that can measure the shareholders value
through different traditional models. Recent studies, using a variety of evaluation
technique and enlarged database, have reexamined the issue and found the earlier
conclusion less unequivocal than was thought to be. Stern (1990) documented that
EVA as a performance measurement model captures the true economic profit of an
organization. EVA based financial management and incentive compensation scheme
gives manager better quality information and superior motivation to make decisions
that will create the maximum shareholders wealth in an organization.
EVA is a performance evaluation model which is most closely linked to the creation
of shareholders wealth over a period of time. The financial management and the
incentive compensation system based on EVA give the manager superior information
and higher motivation. Accordingly, EVA makes the measurement process as the focal
point for financial reporting, planning and decision making. The executives of an
organization need to look out appropriate techniques that may guard them against any
future attacks by corporate offender. The best way of maximizing shareholder return
is to offer incentives to managers for making decisions that boost long term corporate
value. A major step is to provide cash bonus or stock option arrangements with
incentives that create built-in share value. The objective is to motivate the managers
to look beyond short term measures of economic performance by essentially turning
managers into owners. The manager may be guided by EVA and pursue such
objectives that improve operating profits investing more capital. Managers can be
remunerated a proportion of both the total EVA and the positive change in EVA.
The present section briefly throws light on the researches carried out so far by
the scholars actively engaged in the field. The studies have been appraised and
summed up in order of their latest occurrence and the subsequent paragraphs offer a
chronological account of the literature reviewed:
Kyriazis and Anastassis (2007)1 investigates the relative explanatory power of the
Economic Value Added (EVA) model with respect to stock returns and firms' market
value, compared to established accounting variables (e.g. net income, operating
income), in the context of a small European developing market, namely the Athens
Stock Exchange, in its first market-wide application of the EVA measure. Relative
information content tests reveal that net and operating income appear to be more
value relevant than EVA. Additionally, incremental information tests suggest that EVA
unique components add only marginally to the information content of accounting
profit. Moreover, EVA does not appear to have a stronger correlation with firms'
Market Value Added than the other variables, suggesting that for our Greek dataset
EVA, even though useful as a performance evaluation tool, need not necessarily be
more correlated with shareholder's value than established accounting variables.
P. Mohanty (2006)2 this study was conducted basically by taking 3 major
companies: Tata Steel limited, Godrej Consumer Product Limited & NIIT limited
which is an information technology company in India. In this study data of 4 years i.e.
from 2001-2005 was taken. This study argued that, contrary to popular perception.
EVA is actually the excess free cash flow the company generates to meet the
1
Dimitris Kyriazis, Christos Anastassis (January 2007). The Validity of the Economic Value
Added Approach:
an Empirical Application, European Financial Management Volume 13
Issue 1, Page71 (January, 2007).
2
expectations of the investors. In this sense, it is both a cash flow based measure and it
is also positively associated with the return the investors get on their investment in the
company. This study recommends an alternative performance measurement that
addresses some of the limitations of both the traditional Eva-based and ESOP-based
performance measurement systems.
Roji George (2005)4 reveals that there is a positive relationship between EVA and
productivity, and a negative one between EVA and non-performing assets. The
main objectives of this study were to measure the economic value added; to
analyze relationship between EVA and non-performing assets; and the relationship
between EVA and employee productivity. This study analyzed the performance of
21 banks (8public sector banks and 13 private sector banks) during the years
2000-01, 2001-02 and 2002-03. A comparative study based on the public and
private sector was also made. It was found that banks, both private and public
sector ones, create economic value and that there was a positive relationship
between EVA and productivity, and a negative one between EVA and nonperforming assets.
3
Ghanbari, Ali M. and Sarlak Narges (2006). Economic Value Added: An Appropriate Performance
Measure in Indian Automobile Industry. The Icfaian Journal of Management Research, Vol. V, No. 8,
2006, pp. 45-62.
4
Roji George (May, 2005): Computation of EVA in Indian Banks. The ICFAI Journal of Bank
Management, Vol IV. No. 2, May, 2005B.M, pp.30-44.
Anil Misra (November, 2005): Linkages between Economic Value Added and Share Prices: An empirical
study of Indian Corporate Sector. The ICFAI Journal of Industrial Economics, Volume: II, Issue: 4, Pages:
30-57.
6
Irala, Lokanadha Rddy (2005)7 find that EVA stories in the west are quite
encouraging, empirical research is not sufficient for establishing the claim of
EVA as a better measure. However, there is also not much research to provide
it otherwise. In the case of India either way research is very inadequate.
Although not a panacea, EVA based compensation plans will drive managers
to employ a firms assets more productively and EVA should help reduce the
difference in the interest of managers and shareholders, if not perfectly align
them.
Karam Pal and Garg M C (2004)9 concluded that EVA may be a broader
gauge of judging the contribution of an organization towards the national
economic development and growth. Pressure for better financial performance
Irala, Lokanadha Reddy (2005). Eva: The Right Measure of Managerial Performance? The Journal
of Accounting and Finance, Vol. 19, No.2, April-September 2005, pp.77-87.
8
Andrew C. Worthington (December, 2004): Australian Evidence concerning the information content
of Economic Value Added., Australian Journal of Management, Vol 29, No.2, Dec 2004.
9
Karam Pal and Garg M.C. (2004), EVA: A Performance Measurement Tool. JIMS 8M, April-June,
2004, pp.39-45.
previous
recommendations
and
to
investigate
some
research
Mitali Sen (2003)10 as per the concept of EVA, there are basically two
fundamental drivers of shareholders wealth to which manager should be
sensitive. First being, the identification of the fact that al capital lodged in the
business generates returns in excess of the cost of capital, with the intention of
returning non-productive capital back to shareholders. Secondly, the finance
manager should constantly go for investing in value creating projects and
strategies. These two drivers adopted systematically, empowers the managers
to develop strategies by which the company can become EVA positive and
continues to add value to shareholders wealth. In this study an attempt was
made to analyze the EVA trends of TATA STEEL for a period of 11 years i.e.
from 1990-91 to 2000-01 and chalked out the course of action for making
TISCOs EVA positive through sensitivity analysis.
10
11
momentum in future. Mr. U.K. Dikshit, Director of SCOPE was happy that the
PSUs are showing active interest in the subject and he hoped that the PSUs
may also adopt such a framework to improve their performance.
12
Mclaren, Josie (2003). A Sterner Test. Financial Management, July/August 2003, pp. 1819.
13
Alfred Rappaport (November, 2002), Creating Shareholder Value: A Guide for Managers
and Investors. The ICFAI Journal of Applied Finance, Vol. 8, No. 6, November 2002. pp.6883.
14
Dr. B P Verma (Associate Professor of Finance at UTI Institute of Capital Markets, 2002),
Economic Value Addition by Indian Banks.
15
Salmi, Timo and Ilkka Virtanen (2001) 17. The value-based management
performance measure EVA introduced by Stern Stewart & Co. is an
incarnation of the underlying residual income (RI) concept. The concept is
evaluated and compared with traditional profitability measures within a
controlled simulation framework. It is observed that EVA is very sensitive to
its cost of equity component, but it is unexpectedly insensitive to its cost of
debt component under regular conditions. EVA and its variability are observed
to be strongly affected by the firm's growth policies because of leverage
effects. EVA is observed to be much more unstable than the traditional return
on investment and directly related to the return on equity measure.
Methodologically, the paper demonstrates the advantages of using a controlled
simulation approach in financial research.
Saha (2000)18 observed that liberalization of the Indian economy over the last
10 years has lead to a shift in the corporate goal of the public and private
corporates in the country. Earlier it was mandatory for their goal to have a
16
Sangameshwaran, Prasad (2002). Couting EVA, the TCS Way. Indian Management, August 2002,
pp.68-83.
17
Salmi, Timo and Ilkka Virtanen (2001): Economic Value Added: A simulation analysis of the trendy,
18
Saba, Gurudas (2000). Shareholders Value and EVA, New Corporate Goals, The Charted
Accountant, April 2000, pp.46-51.
socio-economic focus. There is a major change with the focus now being
primarily on enhancing the shareholder value and recommend shift from
Earning Per Share, Price Earning Ratio, etc., to Economic Value Added and
Market Value Added. He demonstrated how EVA is the best measure for
measuring shareholders value enhancement.
1. Consistent with the theory , economic value added is positively and significantly
associated with firm value, and
2. Contrary to Stewarts (1991) expectations, the explanatory power of economic
value added is smaller than that of earning. Earnings are still the most important
determinant of firm value.
19
20
Chapter III
Research
Methodology
Chapter - III
Research Methodology
3.1 Introduction:One of the most often used terms in business today is Shareholders value. The
equity culture wild fire is spreading rapidly from the US to the rest of the world
(Thakor et al, 2000). It is seen as crucial all over the world. In Sweden the new
measurement systems of shareholder value creation were introduced in the last decade
and have been slowly introduced in various companies. Indeed, some of the leading
companies have made the creation of shareholders value as one of their key corporate
objectives, here in this chapter; an attempt has been made to design a comprehensive
methodology to carry out the research work. From research point of view, the
methodology needs to be cautiously designed to present results that are as objective as
realistic. A healthy comprehensible modus operandi empowers the new research
investigator to re-examine the study situation. Good methodology follows the
standards of the established conventions.
An attempt has been made to analyze the EVA of banks on the ownership
structure. For this, banks have been classified as public sector banks and private
sector banks. This study also tries to rank the wealth creators. Further, it examines
the cost of equity capital of banks.
3.3 Research Design:It is not possible in practice for an individual research work to approach all the bits
and pieces in the universe. In the present study, only only a small amount of bits and
pieces from the universe have been taken for the purpose of the study on the basis of
stratified sampling. The sample so selected constitutes the sample design for the
purpose. A research design is a definite plan for obtaining a sample from a given
population. Research design means a sketch or a drawing of a research projects
structure. It comprises a series of prior pronouncements that, taken together, provide
a roadmap for carrying out a research project. The research design of the present
study is outlined hereunder:
3.3.1 Data Collection: For the purpose of this study, secondary data have been used.
The relevant secondary data have been collected from a financial database of
Centre for Monitoring Indian Economy (CMIE) called Prowess, Business
Newspapers and via Internet etc. The study required variety of data; therefore
websites like www.indiainfoline.com, www rbi.org and www.indiasat.com have
been searched.
3.3.2 Selection of Sample: This study has been conducted among Indian
commercial banks. Listing its shares on an Indian stock exchange was a
prerequisite. For the present study data on 32 Indian private and public sector
banks that are listed on the Bombay Stock Exchange are taken. The period
covered in the study is five years from 2001-02 to 2005-06. These banks are:-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
3.3.3 Procedure: - EVA is the operating profit minus an appropriate charge for the
opportunity cost of all capital invested in a firm. The standard and widely accepted
method for calculating EVA is,
EVA = Net operating Profit Adjusted for Taxes-(Invested Capital*Weighted
Average Cost of capital).
This method is known as Entity method.
Thampy and Baheti have followed a method which was proposed by Tom
Copeland, Tim Koller and Jack Murrain in 1996. Parasuraman also proposes this
method. This method, named as the equity approach, is for valuation of banks.
They say, The equity approach is more suited to banks compared to the entity
approach since a big part of banking business is liability management, i.e., raising
deposits at rates below the opportunity cost of capital. The deposit franchise given
by the banking license gives the bank the potential to create value on the liability
side of its balance sheet. The liability side of the banks balance sheet is part of
the business operations of the bank, and it is not pure financing. This makes the
equity approach more appropriate.
In equity approach,
Cost of Equity: Cost of equity is the minimum rate of return, which has to be
made from an equity-financed project, in order to maintain the present wealth of
the shareholders unaffected. It can be computed based on Capital asset pricing
model (CAPM). According to CAPM,
Cost of equity, Ke = Risk free rate + (Beta * Market Premium).
Risk-free Rate: Risk free rate is the rate of return from securities, which are
Beta: beta is the measure of the volatility of a stock in relation to the market. It is
the index of systematic risk. Beta for the each stock was calculated based on the
daily stock price with Bombay Stock Exchanges sensex returns as the proxy for
the market returns. Beta was calculated by using the data from the period April 1,
2001 to March 31, 2006.
Market Premium: Market premium is the excess return offered by the market
over the risk-free rate.
i.e. Market Premium= Return of Market- Return from risk free securities.
It is -7.11, -6.74, .66, -3.54 & -.63 for the years 2001-02, 2002-03, 2003-04,
2004-05, 2005-06 respectively.
Non-Performing Assets: In simple words, NPAs are assets which are not
performing, i.e., which are not giving return. An asset is classified as NPA, if dues
in the form of either principal or interest or both are not paid by the borrower for a
period of 180 days. However, with effect from March 2004, the period of 180
days would be reduced to 90 days. In case of multiple facilities granted to a
borrower, if one of his accounts qualifies for NPA, all other accounts, irrespective
of their status, have to be classified as NPAs. For this study, net NPAs are
considered.
analysis. With the help of this technique we can draw inferences about whether
the samples have been drawn from population having the same mean.
-
Chapter IV
Analysis
Chapter - IV
Analysis
Introduction
The results of the study give a picture of positive EVAs, contrary to previous study. This
clearly shows that Indian banks are improving their performance not only in making
profits but also in EVAs. EVA is a relatively new concept in the area of financial
management. It is the financial performance measure that comes closest than any other to
capture the true economic profit of a firm EVA is the performance measure most directly
linked to the creation of shareholder wealth over time. It is a value-based framework that
provides a unique insight into value creation and unites the finance theory with the
competitive strategy framework. After the data has been collected the next step is to
analyze the data. The analysis of data requires a number of closely related operations
such as establishment of categories, the application of these categories to raw data
through coding, tabulation and then drawing statistical inferences. The data should
necessarily be condensed into a few manageable groups and tables for further analysis.
Editing is the procedure that improves the quality of data for coding. With coding the
stage is ready for tabulation. Tabulation is the part of the technical procedure wherein the
classified data are put into the forms of tables. In the present study also I have converted
the whole amount of data into various tables so that to convert the data into more
understandable and manageable form.
By analysis we mean the computation of certain indices or measures along with searching
for patterns of relationship that exist among the data groups. Analysis can be of two
types descriptive analysis & inferential analysis. For the analysis of data I have used
various tools like correlation. With the help of correlation relationship between EVA&
NPA and EVA& Employee Productivity has been calculated. Also ranking of different
banks have been done by using ENA Net worth Ratio.
So the analysis part with the help of different tables & graphs are showing here to arrive
at a conclusion about the performance of banks in the current scenario.
The first table here is the EVA of all the banks under study.
Second table is of EVA of all the banks of public sector under study.
Allahabad Bank
2001-02
2002-03
2003-04
2004-05
2005-06
EVA
EVA
EVA
EVA
EVA
93.47
67.02
295.71
473.35
595.46
Andhra Bank
190.65
318.19
444.74
410.05
431.08
Bank Of Baroda
425.92
648.63
694.32
607.14
456.20
Bank Of India
415.44
752.75
899.98
301.72
29.23
41.73
47.87
-78.96
629.21
n.a
27.71
47.70
49.49
-38.53
-15.81
-120.59
-4.11
-102.02
-31.00
-64.62
22.15
33.87
51.74
43.24
53.55
Corporation Bank
256.67
377.68
470.62
339.87
294.49
Dena Bank
-67.50
89.12
221.45
-38.27
-19.18
11.16
13.65
20.32
-32.99
12.81
87.61
115.08
146.96
106.82
177.12
H D F C Bank Ltd.
304.13
461.88
560.52
752.75
1016.23
I C I C I Bank Ltd.
25.99
-212.65
1917.36
2147.57
2619.72
98.08
131.61
104.57
-43.37
34.23
202.80
384.13
618.66
629.47
876.88
39.57
74.45
280.22
115.25
-55.72
-2280.06
389.77
-102.83
61.49
-1589.97
236.66
332.31
408.03
136.89
198.63
38.41
34.29
84.89
76.85
102.59
335.09
473.90
689.57
474.02
426.51
620.34
880.12
1320.60
1484.98
1416.04
47.74
41.13
53.73
7.98
59.63
91.29
204.01
276.26
95.18
181.25
2068.34
3243.25
3814.51
3423.86
2871.91
67.88
111.52
165.28
152.55
111.02
93.35
160.79
228.75
193.72
222.94
Syndicate Bank
171.75
259.11
375.78
274.60
418.15
U T I Bank Ltd.
125.42
195.42
263.13
346.60
424.90
315.91
545.59
671.79
495.87
631.76
31.10
8.41
25.46
-112.63
0.00
131.60
223.41
412.54
254.62
107.67
4137.32
10443.76
15410.01
13030.71
12624.66
Table 1 shows the calculated EVA of all the banks under study whether it is private sector
banks or public sector banks for this the formula explained in research methodology for
calculating EVA has been used. The total EVA for the year 2001-02 is Rs.4137.32cr, for
the year 2002-03 it is Rs10443.76cr. for the year 2003-04 it is Rs.15410.01cr, for the year
2004-05 it is Rs. 13030.71cr & for the year 2005-06 it is 12624.66cr. By analyzing this
chart we can say that banks are continuously improving its position by increasing the
EVA of its shareholders continuously. In the last year of study the EVA was declining
because of merger of Bank of Punjab (Merged). In the first year i.e in 2001-02 only three
banks named Centurion Bank of Punjab, Dena Bank & Industrial Development Bank of
India had negative EVA. In the second year i.e in 2002-03 two banks named Centurion
Bank and ICICI Bank Ltd. had negative EVA. In 2003-04 again Centurion Bank Ltd. &
Industrial Development Bank of India Had negative EVA. In 2004-05 total 7 banks had
negative EVA where as in 2005-06 out of all banks 5 banks were contributing negative
EVA.
S.No.
Company Name
Allahabad Bank
2001-02
2002-03
2003-04
2004-05
2005-06
EVA
EVA
EVA
EVA
EVA
93.47
67.02
295.71
473.35
595.46
Andhra Bank
190.65
318.19
444.74
410.05
431.08
Bank Of Baroda
425.92
648.63
694.32
607.14
456.20
Bank Of India
415.44
752.75
899.98
301.72
629.21
Corporation Bank
256.67
377.68
470.62
339.87
294.49
Dena Bank
-67.50
89.12
221.45
-38.27
-19.18
202.80
384.13
618.66
629.47
876.88
335.09
473.90
689.57
474.02
426.51
620.34
880.12
1320.60
1484.98
1416.04
91.29
204.01
276.26
95.18
181.25
2068.34
3243.25
3814.51
3423.86
2871.91
10
11
12
67.88
111.52
165.28
152.55
111.02
13
93.35
160.79
228.75
193.72
222.94
14
Syndicate Bank
171.75
259.11
375.78
274.60
418.15
15
315.91
545.59
671.79
495.87
631.76
16
Vijaya Bank
131.60
223.41
412.54
254.62
107.67
5413.01
8739.23
11600.56
9572.74
9651.39
Total
Average EVA
338.31
546.20
725.04
598.30
603.21
Table 2 explains the EVA of the public sector banks. In all the years from 2001-2006
among all the public sector banks which are included in this study, State Bank of
India is the No. 1 performer. In the year 2001-02 total EVA of public sector banks was
Rs338.31cr, in year 2002-03 EVA was Rs546.20cr, in year 2003-04 it reaches to
Rs725.04cr, in the year 2004-05 it was Rs598.30cr & in the year 2005-06 EVA was
Rs603.21cr. So public sector banks are improving their performance continuously.
S.
No.
2002-03
2003-04
2004-05
2005-06
Company Name
EVA
2068.34
3243.25
3814.51
3423.86
2871.91
620.34
880.12
1320.60
1484.98
1416.04
202.80
384.13
618.66
629.47
876.88
315.91
545.59
671.79
495.87
631.76
Bank Of India
415.44
752.75
899.98
301.72
10
629.21
Allahabad Bank
93.47
12
67.02
16
295.71
12
473.35
595.46
Bank Of Baroda
425.92
648.63
694.32
607.14
456.20
190.65
318.19
444.74
410.05
431.08
Andhra Bank
Oriental Bank Of
Commerce
335.09
473.90
689.57
474.02
426.51
10
Syndicate Bank
171.75
10
259.11
10
375.78
11
274.60
11
418.15
10
11
Corporation Bank
State Bank Of
Travancore
256.67
377.68
470.62
339.87
294.49
11
93.35
13
160.79
13
228.75
14
193.72
13
222.94
12
12
Rank
EVA
Rank
EVA
Rank
EVA
Rank
EVA
Rank
13
91.29
14
204.01
12
276.26
13
95.18
15
181.25
13
14
67.88
15
111.52
14
165.28
16
152.55
14
111.02
14
15
Vijaya Bank
131.60
11
223.41
11
412.54
10
254.62
12
107.67
15
16
Dena Bank
-67.50
16
89.12
15
221.45
15
-38.27
16
-19.18
16
Table 4.3 Ranking of all Public Sector Banks under study based on EVA
Table 3 shows the ranking of all public sector banks under study. The very important
thing to be noted under this study is that in all the 5 years of stdy i.e from 2001-2006 one
bank named State Bank of India is at No. one position. Second position from the last
years was occupied by Punjab National Bank. Whereas the remaining positions are not
fixed they are continuously changing in the whole period of study.
2001-02
2002-03
EVA to Net
worth
Ratio
Rank
EVA to
Net worth
Ratio
22.70
29.78
31.24
24.74
27.60
15.30
22.25
10
24.72
17.14
16.74
Allahabad Bank
10.69
15
6.13
16
19.65
13
20.49
16.37
21.90
23.59
27.17
18.28
15.18
Andhra Bank
24.51
30.46
31.38
22.32
14.90
Syndicate Bank
12.18
14
22.09
11
22.66
11
13.00
11
14.76
17.31
23.05
22.62
12
13.90
10
13.90
13.27
11
23.71
24.05
7.33
14
12.89
Bank Of India
17.03
23.02
23.23
10
6.76
15
12.63
26.20
30.28
30.10
20.24
11.91
10
S.No.
10
Company Name
Rank
Rank
2004-05
EVA to
Net
worth
Ratio
Rank
2005-06
EVA to
Net
worth
Ratio
Rank
11
14.61
10
19.66
12
19.19
14
14.22
10.39
11
12
12.54
13
16.02
15
17.06
15
11.15
12
8.73
12
13
Corporation Bank
Oriental Bank Of
Commerce
21.33
22.82
25.92
14.25
8.25
13
14
Vijaya Bank
26.32
27.54
30.89
16.02
6.45
14
15
Bank Of Baroda
12.85
12
16.04
14
14.00
16
10.79
13
5.82
15
16
Dena Bank
-22.19
16
17.82
13
28.95
-3.49
16
-1.44
16
Table4. 4 Ranking of all Public Sector Banks based on EVA/ Net worth Ratio
Table 4 shows that if we do ranking on the bases of EVA/Net Worth Ratio then in the
years 2004-05, 2005-06 Indian Overseas Bank is at No. one. State Bank of Travencore
was at 9th rank in the year 2001-02 but it is at 2nd rank in the year 2005-06.Allahabad
Bank was at 9th rank in the year 2001-02 and in the year it came at 3 rd rank, which means
that it is improving continuosly.Vijaya Bank was at 1st rank in the year 2001-02 and now
it is at 14th rank which states that its performance is declining continuously in
consideration to other banks.
Company Name
(Rs. In cr.)
2001-02
2002-03
2003-04
2004-05
2005-06
EVA
EVA
EVA
EVA
EVA
29.23
41.73
47.87
-78.96
27.71
47.70
49.49
-38.53
-15.81
-120.59
-4.11
-102.02
-31.00
-64.62
22.15
33.87
51.74
43.24
53.55
11.16
13.65
20.32
-32.99
12.81
87.61
115.08
146.96
106.82
177.12
H D F C Bank Ltd.
304.13
461.88
560.52
752.75
1016.23
I C I C I Bank Ltd.
25.99
-212.65
1917.36
2147.57
2619.72
98.08
131.61
104.57
-43.37
34.23
39.57
74.45
280.22
115.25
-55.72
10
n.a
11
12
13
-2280.06
389.77
-102.83
61.49
-1589.97
236.66
332.31
408.03
136.89
198.63
38.41
34.29
84.89
76.85
102.59
14
47.74
41.13
53.73
7.98
59.63
15
U T I Bank Ltd.
125.42
195.42
263.13
346.60
424.90
16
31.10
8.41
25.46
-112.63
0.00
-1275.69
1704.53
3809.45
3457.96
2973.27
-79.73
106.53
238.09
216.12
185.83
Total
Average EVA
It can be understood from Table 3 that from 2001-2002 to 2003-04 EVA of private sector
banks are increasing continuously but after that from years 2004-05 it starts declining. In
the year 2005-06 total EVA generated by private sector banks was 185.83. In year 200506 three banks were generating negative EVA and the maximum EVA was generated by
ICICI bank Ltd. among all public sector banks.
Table4.6: Ranking of all Private Sector Banks under study based on EVA
S.No.
Company Name
EVA
2002-03
Rank
EVA
2003-04
Rank
EVA
2004-05
Rank
EVA
2005-06
Rank
EVA
Rank
I C I C I Bank Ltd.
25.99
12
-212.65
16
1917.36
2147.57
2619.72
H D F C Bank Ltd.
304.13
461.88
560.52
752.75
1016.23
U T I Bank Ltd.
Jammu & Kashmir
Bank Ltd.
125.42
195.42
263.13
346.60
424.90
236.66
332.31
408.03
136.89
198.63
87.61
115.08
146.96
106.82
177.12
38.41
34.29
11
84.89
76.85
102.59
47.74
41.13
10
53.73
7.98
10
59.63
22.15
13
33.87
12
51.74
10
43.24
53.55
98.08
131.61
104.57
-43.37
14
34.23
10
11.16
14
13.65
13
20.32
14
-32.99
12
12.81
10
11
31.10
8.41
14
25.46
13
-112.63
16
0.00
11
4
5
6
7
8
9
12
13
14
15
16
Ltd. [Merged]
Bank Of Rajasthan
Ltd.
Indusind Bank Ltd.
Centurion Bank Of
Punjab Ltd.
Industrial
Development Bank
Of India Ltd.
Bank Of Punjab Ltd.
[Merged]
27.71
11
47.70
49.49
11
-38.53
13
-15.81
12
39.57
74.45
280.22
115.25
-55.72
13
-120.59
15
-4.11
15
-102.02
15
-31.00
11
-64.62
14
2280.06
16
389.77
-102.83
16
61.49
1589.97
15
29.23
10
41.73
47.87
12
-78.96
15
n.a
16
Table 6 shows the ranking of banks according to their EVA. According to EVA, ICICI
Bank Ltd. is at Ist rank from the last 3 years i.e. from 2003-04, 2004-05, 2005-06. HDFC
Bank is at No. 2 from the last 2 years. In the year 2001-02, 2002-03 & 2003-04 this bank
was at 1st rank. Out of all private sector banks ICICI Bank Ltd. has improved a lot
because it was at 12th rank in the year 2001-02, whereas its rank is 1st in the year 200506.
Company Name
2001-02
EVA to
Net
Worth
Ratio
2002-03
Rank
EVA to Net
Worth Ratio
Rank
2003-04
EVA to
Net
Worth
Ratio
Rank
2004-05
EVA to
Net
Worth
Ratio
2005-06
Rank
EVA to
Net Worth
Ratio
H D F C Bank Ltd.
15.59
20.51
20.81
16.65
19.45
15.57
20.56
25.50
17.96
18.72
U T I Bank Ltd.
20.40
21.27
23.12
14.31
14.72
19.52
21.73
22.65
14.77
14.17
7.52
12
6.46
12
14.23
13
10.23
11.93
I C I C I Bank Ltd.
0.39
14
-2.92
15
23.40
16.95
11.70
Rank
25.25
26.76
25.60
8.38
11.19
13.54
11.34
11
15.15
10
-28.91
14
9.53
17.38
13.22
13.89
14
1.77
9.35
15.12
20.52
15.05
11
-6.41
11
3.41
11.86
11
16.72
15.02
12
-10.99
13
-4.36
7.04
13
12.36
10
35.01
13.90
-6.43
-217.60
16
-20.37
16
-165.73
16
-6.61
12
-6.94
-34.84
15
5.71
13
#DIV/0!
1.04
10
-25.14
15.28
19.45
19.64
-42.85
15
#VALUE!
12.25
10
3.02
14
8.38
15
-54.18
16
#DIV/0!
Table 4. 7 Ranking of all Private Sector Banks based on EVA/ Net worth Ratio
Table 7 shows that if we do ranking on the bases of EVA/Net worth Ratio then HBFC
Bank is at No. 1 which was at 5 th rank in the year 2001-02. According to only EVA ICICI
Bank Ltd. was at rank 1 whereas if we look on the bases of EVA/Net worth Ratio then it
is at No. 6. Biggest growth in banks is at Kotak Mahindra Bank which was at12th No in
the year 2001-02 but in the year 2005-06 it is at 5 th no. Bank of Rajasthan Ltd., Indusind
Bank Ltd., Centurion Bank of Punjab, & Industrial Development Bank of India Ltd. has
negative EVA/Net worth Ratio.
Banks
No. of
Banks
EVA
2001-02
Public Sector
Banks
Av. EVA
Private Sector
Banks
16
16
Av. EVA
Total
Total Av.
32
2002-03
2003-04
2004-05
2005-06
5413.01
8739.23
11600.56
9572.74
9651.39
338.31
546.20
725.04
598.30
603.21
-1275.69
1704.53
3809.45
3457.96
2973.27
-79.73
238.09
15410.0
1
216.12
13030.7
1
185.83
4137.32
106.53
10443.7
6
12624.66
129.29
326.37
481.56
407.21
394.52
Table 4 explains the Total EVA & Av. EVA made by public sector banks & private
sector banks. The combined EVA of both the banks have also calculated. In the year
2001-02, the combined EVA of banks was Rs.4137.32cr. in this year private sector
banks EVA was in negative, it was Rs.1275.69cr. by 2002-03 both public sector
banks and private sector banks started making positive EVAs. It is interesting to note
that public sector banks have outperformed the private sector banks in every year.
Graphical representation of EVA is giving the clear picture of position of EVA of
banks by demarcating into private sector banks and public sector banks.
2001-02
2002-03
RAN
K
Rank
EVA
2004-05
Ran
k
EVA
2005-06
Ran
k
Company Name
EVA
2068.34
3243.25
3814.51
3423.86
2871.91
25.99
27
-212.65
32
1917.36
2147.57
2619.72
620.34
880.12
1320.60
1484.98
1416.04
H D F C Bank Ltd.
304.13
461.88
560.52
752.75
1016.23
I C I C I Bank Ltd.
EVA
2003-04
EVA
Rank
202.80
10
384.13
618.66
629.47
876.88
315.91
545.59
671.79
495.87
631.76
Bank Of India
415.44
752.75
899.98
301.72
13
629.21
Allahabad Bank
93.47
16
67.02
23
295.71
15
473.35
595.46
Bank Of Baroda
425.92
648.63
694.32
607.14
456.20
Andhra Bank
190.65
11
318.19
12
444.74
11
410.05
10
431.08
10
335.09
473.90
689.57
474.02
426.51
11
U T I Bank Ltd.
125.42
14
195.42
16
263.13
18
346.60
11
424.90
12
Syndicate Bank
171.75
12
259.11
13
375.78
14
274.60
14
418.15
13
Corporation Bank
256.67
377.68
10
470.62
10
339.87
12
294.49
14
93.35
17
160.79
17
228.75
19
193.72
16
222.94
15
236.66
332.31
11
408.03
13
136.89
18
198.63
16
91.29
18
204.01
15
276.26
17
95.18
21
181.25
17
87.61
19
115.08
19
146.96
22
106.82
20
177.12
18
67.88
20
111.52
20
165.28
21
152.55
17
111.02
19
131.60
13
223.41
14
412.54
12
254.62
15
107.67
20
38.41
23
34.29
27
84.89
24
76.85
22
102.59
21
47.74
21
41.13
26
53.73
25
7.98
25
59.63
22
22.15
28
33.87
28
51.74
26
43.24
24
53.55
23
98.08
15
131.61
18
104.57
23
-43.37
30
34.23
24
11.16
29
13.65
29
20.32
30
-32.99
27
12.81
25
31.10
24
8.41
30
25.46
29
-112.63
32
0.00
26
27.71
26
47.70
24
49.49
27
-38.53
29
-15.81
27
-67.50
30
89.12
21
221.45
20
-38.27
28
-19.18
28
39.57
22
74.45
22
280.22
16
115.25
19
-55.72
29
-120.59
2280.06
31
-4.11
31
-102.02
31
-31.00
26
30
32
389.77
-102.83
32
61.49
23
-64.62
1589.97
29.23
25
41.73
25
47.87
28
-78.96
31
n.a
32
Vijaya Bank
Dena Bank
Indusind Bank Ltd.
Centurion Bank Of Punjab
Ltd.
Industrial Development Bank
Of India Ltd.
Bank Of Punjab Ltd.
[Merged]
Table:4.9 Combined ranking of all the banks under study according to EVA
Table 9 shows that on the bases of overalls ranking of all the banks based on EVA, State
Bank of India is at 1st rank from the last five years whose EVA was Rs2871.91cr in the
year 2005-06, Rs.3423.86cr. in the year 2004-05, Rs3814.51cr in the year2003-04, Rs
3243.25cr in the year 2002-03, and its EVA was 2068.34cr. in the year 2001-02. The
31
highest improvement we can see in ICICI Bank ltd which was at 27 th rank in the year
2001-02 and in the year 2005-06 it reached at 2nd rank. The most important thing to be
noted in this study is that out of the top ten ranks 8 ranks have occupied by Public Sector
Banks. Only 2 banks i.e. ICICI Bank Ltd & HDFC Bank Ltd have got 2 nd & 4th Rank
respectively in the year 2005-06. Industrial Development Bank of India is at 31st rank in
the year 2005-06 whereas it was at 32 nd rank in the year 2001-02. it shows that this bank
have made no great improvement in the last 5 years.
Table: 4.10 Ranking of EVA Creators under study based on EVA/Net worth Ratio
200102
Company Name
200203
200304
200405
2005-06
E/N*100
Rank
E/N*100
Rank
E/N*100
Rank
E/N*100
Rank
22.70
29.78
31.24
24.74
E/N*100
27.60
Rank
1
H D F C Bank Ltd.
15.59
13
20.51
17
20.81
19
16.65
19.45
15.57
14
20.56
15
25.50
15.30
15
Allahabad Bank
Punjab National
Bank
10.69
26
22.25
11
6.13
28
21.90
23.59
Andhra Bank
Syndicate Bank
24.51
12.18
24
U T I Bank Ltd.
20.40
19.52
10
17.96
18.72
24.72
11
17.14
16.74
19.65
20
20.49
16.37
27.17
18.28
15.18
30.46
31.38
22.32
14.90
22.09
12
22.66
16
13.00
17
14.76
21.27
14
23.12
15
14.31
12
14.72
21.73
13
22.65
17
14.77
11
14.17
10
17.31
11
23.05
22.62
18
13.90
15
13.90
11
13.27
20
23.71
24.05
12
7.33
22
12.89
12
17.03
12
23.02
23.23
14
6.76
23
12.63
13
7.52
27
6.46
27
14.23
27
10.23
20
11.93
14
26.20
30.28
30.10
20.24
11.91
15
0.39
29
-2.92
31
23.40
13
16.95
11.70
16
25.25
26.76
25.60
8.38
21
11.19
17
14.61
18
19.66
18
19.19
22
14.22
14
10.39
18
13.54
19
11.34
26
15.15
24
-28.91
30
9.53
19
17.38
10
13.22
24
13.89
29
1.77
24
9.35
20
Corporation Bank
Oriental Bank Of
Commerce
12.54
22
16.02
23
17.06
23
11.15
18
8.73
21
21.33
22.82
10
25.92
14.25
13
8.25
22
Vijaya Bank
26.32
27.54
30.89
16.02
10
6.45
23
Bank Of Baroda
12.85
21
16.04
22
14.00
28
10.79
19
5.82
24
Where E= EVA
15.12
17
20.52
16
15.05
25
-6.41
27
3.41
25
-22.19
30
17.82
20
28.95
-3.49
26
-1.44
26
11.86
25
16.72
21
15.02
26
-10.99
29
-4.36
27
7.04
28
12.36
25
35.01
13.90
16
-6.43
28
-217.60
32
-20.37
32
-165.73
31
-6.61
28
-6.94
29
-34.84
31
5.71
29
32
1.04
25
-25.14
30
15.28
16
19.45
19
19.64
21
-42.85
31
#VALUE!
31
12.25
23
3.02
30
8.38
30
-54.18
32
#DIV/0!
32
#DIV/0!
N= Net Worth
Table 1 ranks the banks according to EVA/Net worth ratio based on years 2001-02,
2002-03, 2003-04, 2004-05, 2005-06 figures. This ratio in percentage is known as
standardized EVA means greater efficiency in use of capital. Among all the banks
considered for the study, in the year 2005-06 Indian Overseas Bank has the first rank,
which is a Public Sector Bank. Two Private sector Banks i.e HDFC & City Union
Bank have got 2nd & 3rd rank respectively. Out of the first ten ranks public banks have
occupied 6 ranks and 4 private sector banks found their place in the list. Whereas in
the years 2001-02,2002-03, 2003-04, 2004-05 Vijaya Bank, Andhra Bank, Indusind
Bank & Indian Overseas Bank were at No. 1 respectively as per EVA/Net Worth
Ratio.
eva02
eva03
eva04
eva05
eva06
npa02
npa03
npa04
npa05
npa06
eva02
Pearson
Correlation
.616(**)
.668(**)
.584(**)
.758(**)
0.074
-.727(**)
0.006
.537(**)
.576(**)
eva03
Pearson
Correlation
.616(**)
.838(**)
.769(**)
.555(**)
0.035
0.044
0.06
.903(**)
.926(**)
eva04
Pearson
Correlation
.668(**)
.838(**)
.967(**)
.883(**)
0.155
-0.068
0.125
.892(**)
.896(**)
eva05
Pearson
Correlation
.584(**)
.769(**)
.967(**)
.896(**)
0.065
-0.051
-0.03
.818(**)
.827(**)
eva06
Pearson
Correlation
.758(**)
.555(**)
.883(**)
.896(**)
0.141
0.046
.645(**)
.645(**)
npa02
Pearson
Correlation
0.074
0.035
0.155
0.065
0.141
0.29
.871(**)
0.104
0.043
npa03
Pearson
Correlation
-.727(**
)
0.044
-0.068
-0.051
-.374(*)
0.29
.926(**)
0.12
0.058
npa04
Pearson
Correlation
0.006
0.06
0.125
-0.031
0.046
.871(**)
0.202
0.12
npa05
Pearson
Correlation
.537(**)
.903(**)
.892(**)
.818(**)
.645(**)
0.104
0.12
0.202
.992(**)
npa06
Pearson
Correlation
.576(**)
.926(**)
.896(**)
.827(**)
.645(**)
0.043
0.058
0.12
.992(**)
**
-.374(*)
.926(**)
Table 5 explains the relationship between the EVA & Non-Performing Assets. The
correlation between EVA & NPA in the year ending 2002 was .074, in the year 2003,
2004, 2005, 2006 it was .044, .125, .818 & .645 respectively. So we can say that the
EVA & NPA are positively related to each other. It is important to note that in the year
2002, 2003 & 2004 there is low degree of positive correlation between the two. In the
year 2005 there is high degree of positive correlation, where as in the year 2006 there
is moderate degree of positive correlation between the two.
eva0
2
bpe06
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
**
eva02
eva03
eva04
eva05
eva06
bpe02
bpe03
bpe04
bpe05
bpe05
bpe06
1.00
0.63
0.68
0.60
0.76
0.06
0.07
-0.16
-0.55
-0.64
0.63
1.00
0.84
0.77
0.57
-0.12
-0.18
-0.20
-0.13
-0.10
0.68
0.84
1.00
0.97
0.88
-0.01
0.12
0.08
-0.05
-0.07
0.60
0.77
0.97
1.00
0.90
0.01
0.18
0.15
0.04
0.01
0.76
0.57
0.88
0.90
1.00
0.09
0.31
0.23
-0.17
-0.25
0.06
-0.12
-0.01
0.01
0.09
1.00
0.89
0.86
0.52
0.36
0.07
-0.18
0.12
0.18
0.31
0.89
1.00
0.99
0.59
0.42
-0.16
-0.20
0.08
0.15
0.23
0.86
0.99
1.00
0.96
0.94
-0.55
-0.13
-0.05
0.04
-0.17
0.52
0.59
0.96
1.00
0.97
-0.64
-0.10
-0.07
0.01
-0.25
0.36
0.42
0.94
0.97
1.00
This table illustrates that in the year ending 2002, 2003, 2004, 2005 & 2006the
relationship between the EVA & Business per Employee was .06, -.18, .08, .04 & -.25
respectively. In simple words in the year ending 2002, 2004 & 2005 there is positive
correlation means by that they both are moving in the same direction but in the year
ending 2003 & 2006 they are negatively correlated means they both are moving in the
opposite direction
EVA03
EVA04
EVA05
EVA06
PPE02
PPE03
PPE04
PPE05
PPE06
EVA02
Pearson
Correlation
1.00
0.63
0.68
0.60
0.76
0.03
-0.48
-0.11
-0.16
-0.46
EVA03
Pearson
Correlation
0.63
1.00
0.84
0.77
0.57
-0.14
-0.16
-0.16
-0.02
-0.08
EVA04
Pearson
Correlation
0.68
0.84
1.00
0.97
0.88
-0.05
-0.03
0.10
0.20
0.07
EVA05
Pearson
Correlation
0.60
0.77
0.97
1.00
0.90
-0.01
0.06
0.15
0.30
0.20
EVA06
Pearson
Correlation
0.76
0.57
0.88
0.90
1.00
0.08
-0.10
0.19
0.21
0.04
PPE02
Pearson
Correlation
0.03
-0.14
-0.05
-0.01
0.08
1.00
0.66
0.74
0.46
0.31
PPE03
Pearson
Correlation
-0.48
-0.16
-0.03
0.06
-0.10
0.66
1.00
0.94
0.76
0.77
PPE04
Pearson
Correlation
-0.11
-0.16
0.10
0.15
0.19
0.74
0.94
1.00
0.84
0.61
PPE05
Pearson
Correlation
-0.16
-0.02
0.20
0.30
0.21
0.46
0.76
0.84
1.00
0.75
PPE06
Pearson
Correlation
-0.46
-0.08
0.07
0.20
0.04
0.31
0.77
0.61
0.75
1.00
**
Table 7 explain that the relationship between EVA & Profit per Employee for the year
ending 2002, 2003, 2004, 2005 & 2006 is .03, -.16, .10, .30 & .04 respectively. This
shows that relationship for only one year i.e. 2003 is negatively correlated & others
are positively correlated. It means that they both are moving in the opposite direction.
Whereas for all other years they are positively correlated means by they are moving
in the same direction.
Table 4.14
Model Summaryb
Years
200102
0.15
R2
0.02
ANOVAb
Adjusted R2
-0.01
Coefficientsb
Sig.
0.66
0.42
Unstandardized
Coefficients
Standardized
Coefficients
Beta
Std. Error
0.15
0.18
0.15
Sig.
0.81
0.42
200203
200304
200405
200506
0.06
0.00
-0.03
0.12
0.73
0.03
0.08
0.06
0.35
0.73
0.04
0.00
-0.03
0.04
0.84
0.07
0.34
0.04
0.20
0.84
0.82
0.67
0.66
61.62
0.00
0.61
0.08
0.82
7.85
0.00
0.65
0.42
0.40
20.17
0.00
0.58
0.13
0.65
4.49
0.00
The regression analysis was carried out with NPA as the independent
variable and EVA as the dependent variable. Table 14 presents the summary
results of regression model and F ratio. The value of coefficient of
determination (R2) and adjusted R2 were the highest in case of NPA for the
year 2004. From the table14 we may infer that the coefficient of
determinants (R2) ranged from .000, the lowest (in case of year ending
2006), to 0.136, the highest (in case of year ending 2001) both R 2 adjusted
R2 obtained values less than 0.67 though out the study. The above analysis
provides us the clear conclusion that the independent variables under
consideration are capable of explaining very small variations in EVA. It is
true for all years.
The test for significance of overall model was made through F-Test. The Fratios of in case of NPA was found to be insignificant for all the years at 5%
level of significance except 2002-03, 2003-04. Thus, the overall model is
insignificant in case of NPA for each and every year except 2002-.3, 200304.
Table 4.15
Model Summaryb
Years
R2
Adjusted
R2
ANOVAb
Sig.
Coefficientsb
Unstandardized
Coefficients
Standardized
Coefficients
Sig.
200102
200203
200304
200405
200506
0.15
0.02
-0.01
0.67
0.42
1.97
2.40
0.15
0.82
0.42
0.07
0.00
-0.03
0.15
0.70
0.94
2.44
0.07
0.38
0.70
0.03
0.00
-0.03
0.02
0.88
0.46
3.11
0.03
0.15
0.88
0.05
0.00
-0.03
0.07
0.79
0.82
3.02
0.05
0.27
0.79
0.02
0.00
-0.03
0.02
0.90
0.42
3.36
0.02
0.12
0.90
The regression analysis was carried out with Business per Employee(BPE)
as the independent variable and EVA as the dependent variable. Table 15
presents the summary results of regression model and F ratio. The value of
coefficient of determination (R2) and adjusted R2 were the highest in case of
BPE for the year 2001-02. From the table15 we may infer that the
coefficient of determinants (R2) ranged from .000, the lowest, to 0.02, the
highest (in case of year ending 2001-02). The above analysis provides us
the clear conclusion that the independent variables under consideration are
capable of explaining very small variations in EVA. It is true for all years.
The test for significance of overall model was made through F-Test. The Fratios of in case of BPE was found to be significant for all the years at 5%
level of significance except 2001-02. Thus, the overall model is significant
in case of BPE for each and every year 2001-02.
Table 4.16
Model Summaryb
ANOVAb
Coefficientsb
Unstandardized
Coefficients
Standardized
Coefficients
Sig.
Years
200102
200203
200304
200405
200506
R2
0.03
0.00
0.16
Adjusted
R2
Sig.
Std. Error
Beta
-0.03
0.02
0.88
437.41
2772.71
0.03
0.03
-0.01
0.79
0.38
-2569.48
2899.53
0.10
0.01
-0.02
0.28
0.60
2095.82
0.30
0.09
0.06
3.03
0.09
0.04
0.00
-0.03
0.04
0.84
0.88
-0.16
0.16
0.89
3950.92
0.10
0.53
0.60
6402.43
3680.20
0.30
1.74
0.09
1107.82
5284.21
0.04
0.21
0.84
The regression analysis was carried out with Profit per Employee(PPE) as
the independent variable and EVA as the dependent variable. Table 16
presents the summary results of regression model and F ratio. The value of
coefficient of determination (R2) and adjusted R2 were the highest in case of
PPE for the year 2004-05. From the table16 we may infer that the
coefficient of determinants (R2) ranged from .000, the lowest, to 0.09, the
highest (in case of year ending 2004-05). The above analysis provides us
the clear conclusion that the independent variables under consideration are
capable of explaining very small variations in EVA. It is true for all years.
The test for significance of overall model was made through F-Test. The Fratios of in case of PPE was found to be significant for all the years at 5%
level of significance except 2002-03& 2004-05. Thus, the overall model is
significant in case of BPE for each and every year except 2002-03& 200405.
0.38
Chapter V
Conclusion
Chapter - IV
Conclusion
One might point out that like a corporate; even banks can be judged from the behavior of
their stock prices. However, as bank stocks have not been very active on exchanges,
barring few on few occasions, should we conclude that Indian banks have by and large
failed to add values to their shareholders wealth. The answer is once again no as one
needs to evaluate private and public sector banks in a more dynamic manner than just
looking at their stock prices, Non-Performing Assets (NPAs), C/D ratios and others.
Many Indian banks seem to have destroyed shareholders wealth over a period of time
and only a few have positively contributed to their wealth.
With the help of EVA (Economic Value Added) which tell what the institution is doing
with investors hard earned money, the study examines an appropriate way of evaluating
banks performance and also find out which Indian banks have been able to create ( or
destroy ) shareholders wealth since 2001-02 to 2005-06. Literally, EVA is the quantum of
economic value (or profit) generated by a company in excess of its Cost of Capital
(COC). Mathematically, it is the difference between the Net Operating Profits After
Taxes(NOPAT) and the capital charge; or, the product of capital employed and the
difference between the Return on Capital Employed (ROCE) and the COC. In, principle,
it is a comprehensive financial management system that encompasses a range of
functions like capital budgeting, acquisition pricing, goal-setting, and strategic planning.
This study helps us to dig below the surface numbers to tell us more about the underlying
business and whether there is a prime facie case for using EVA as one of the range of
performance measurement tools. The overriding message of the study is that banks must
always strive to maximize shareholders value without which their stock can never be
fancied by the market.
The above discussion explains the importance of using EVA as a tool for measuring
financial performance. Contrary to the past studies, it is found that Indian Banks are
creating economic value for their shareholders. The study reveals that public sector
banks outperform private sector banks, even though their cost of capital is higher than
that that of private sector banks. The public sector banks could use EVA as their
Unique Selling Proposition in marketing while approaching the capital market. The
finding that profit-making banks have negative EVA supports the irrelevance of the
traditional evaluation criteria of profit-making concept. The cost of equity of Indian
banks is also in a downward path. The study also found that there is a positive
correlation between Economic Value Added and Non-Performing Assets and a
negative correlation between Business per Employee and Profit per Employee. In
other words we can say that study found that there is a negative relationship between
Economic Value Added and Employee Productivity because the combination of
Business per Employee and Profit per Employee becomes Employee Productivity. By
the introduction of SARFAESI Act and controlled credit management, Indian Banks
will be able to reduce the level of NPAs. Profitability of banks is also increasing. So
in future, the banks will be able to show much more economic value in their
performance. This will give them a better edge while approaching the capital market.
Extensive study is required to establish the influence of other factors like non-fund
based income, spread, deployment of funds, market price, etc. it is also expected that
the usage of EVA as a financial performance tool will also be more in India.
This study shows that State Bank of India which is a public sector bank is at rank 1 st
based on the EVA ranking. But if we do ranking on the bases of EVA/Net worth
Ratio, then ranking has been changed at that time Indian Overseas bank comes at 1st
rank. If we look at overall study then Public sector banks are doing very well during
the whole period of study by creating shareholder wealth as far as Private sector
banks are concerned their performance was continuously increasing upto 2002-03 but
after that their overall performance is declining. But some of the private sector banks
like ICICI bank have improved a lot in the last 3 year period.
Bibliography
an Empirical Application,
Pitabas
Mohanty
(September,
2006).
Modified
TVA-based
Performance